Stanford’s John Taylor: Fed's Interest Rate Outlook is Unrealistic

The Federal Reserve has said that interest rates will likely stay low through 2014, although such a policy is unrealistic because a lot could happen between now and then to merit tightening, says John Taylor, a Stanford University professor and a Treasury economist under President George W. Bush.

Some members of the Federal Open Market Committee, the body that votes on interest rates, have suggested that rate hikes may come sooner. Fed Chairman Ben Bernanke himself has said that 2014 is a likely scenario but not etched in stone.

"We're already seeing the economy stronger than the Fed thought and you have to see as the year plays out — I think a couple members said they should be raising rates already. The real question is, this economy is starting to pick up and if inflation picks up they have to raise rates and at least they said this 2014 thing was contingent."

The economy grew 3 percent in the fourth quarter of 2011, outpacing many expectations.

Inflation rates remain within Federal Reserve comfort zones.

While the Fed tends to discount oil prices when setting interest rates, energy prices are threatening to affect the overall economy, Taylor says.

That's especially true in wake of the massive levels of inflation-fueling liquidity the Fed has injected into the economy via stimulus measures like quantitative easing, which are asset purchases from banks.

"At this point in time people have to be aware that inflation pressures could pick up," Taylor said. "I don't see that right now but they could pick up and if the Fed doesn't react, if it gets stuck in this zero for too long, we could definitely see those inflationary pressures and you're seeing signs of that."

However, unemployment rates have improved somewhat in recent months, giving Bernanke room to hint that plans for further quantitative easing remain on hold.

"The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend," Bernanke told the U.S. House of Representatives Financial Services Committee, according to Reuters.